Introduction
With Thematic, you can build, track, and share your very own institutional-quality index - just like the big asset managers do. An index is a collection of securities that are tracked as a whole. An index can be passive (set it and forget it) or more active (optimize portfolio performance).
Indices are created for a wide variety of reasons, but the most common reasons are:
Express an investment strategy or point of view. You have a particular view on investment trends - you can create an index to backtest its performance and see if that thesis might outperform the market or other benchmarks, which could help inform an investment or trading strategy.
Track the performance of an area, sector, or theme. Indices are great for tracking a specific area of interest. Say you’re interested in climate change technology - you can create an index to track aggregate performance of companies in that area. You can also create an index to track a theme (known as a thematic index) - for example, this index tracks companies that may benefit from a rise in an aging population.
Backtest and benchmark performance. Custom indices are a great tool for perspective. By comparing one investment (a portfolio, stock, or other security) to another gives you a sense of relative performance. A common activity is to compare an investment to a broader market index, such as the S&P 500.
Indices can be licensed to investment management firms - called “sponsors” - and the associated fees go to the index creator. Some indices are licensed or converted into ETFs (Exchange Traded Funds), and some portion of the fees charged by the fund also transfer to the index creator. 🤑
Historically, creating an index has been an expensive and time consuming endeavor - and therefore the domain of only the most heavily-capitalized firms. Traditional index calculation firms charge $5,000 at a minimum per index, running up to $50,000 or more depending on the complexity and historical backtesting.
At Thematic, we’re making it more accessible, easier, and dramatically less expensive to create and operate an index. (For individuals and small teams, Thematic is free!)
Let’s get into how to actually build an index.
Step one: start with why
As you start to build your index, it’s helpful to clarify why you’re creating this. You can refer to some of the reasons listed out above. Assuming you’re creating an index to express a point of view, the main question to start with is:
What’s your investment thesis?
You may have a particular insight or opinion that hasn’t been expressed as an investable product yet. Try structuring your thesis in this manner:
I believe that...therefore...based on these facts...
For example, many of the members of the Thematic team have a background in payments. We created an index, the Thematic Payments Innovation Index, because we wanted a way to track the performance of the best-in-class payments products created by the most innovative payments companies all over the world. Here’s our thesis:
We believe that payment innovations will come from all corners of the world, and not from the incumbents, therefore creating the opportunity for outsized investment returns. Our point of view is based on the fact that companies like Stripe (US), Klarna (Nordics), DLocal (LATAM), Alipay (China), and Afterpay (Australia) have grown to dominate their respective markets in the last 10 years.
Once you’ve clarified your reason for building an index, the next step is to figure out which companies should goes into it!
Step two: what goes in
Building an index is a bit like creating a dish. The securities you add are the ingredients. And we have a lot of ingredients to choose from!
For our Unlimited index builders, Thematic platform supports all global equities - that's over 40,000 companies listed on 110 exchanges in 81 countries. We also support over 8,000 ETFs and 30+ cryptocurrencies.
With all of that to choose from, the simplest and easiest way to find what you want is to search for the symbol or name of the company. From the Index Builder, go to "Search," and start typing the names of companies or symbols. For multiple searches, you can separate each search term with a comma. Results will appear in the section below the Search box, and clicking "+" will add it to your index.
Another option for finding securities to add to your index is to use our filtering tools. You can search by sector and industry, across geographies, or several different fundamental metrics (such as market cap, revenue growth, gross margin, etc.). This is a really powerful way to discover companies for consideration.
The last method of finding securities that match your thesis is to use Thematic Assist. Assist is our AI-powered help tool for index creators. Just enter your thesis and it will provide an analysis and potential company matches in under a minute. It's a cost and time effective way of doing research for your index.
Now that you’ve figured out your “ingredients,” it’s time to figure out how much to use of each. In indexing terms, this is called your weighting methodology. The simplest is to start with equal weighted, which means each company has the same impact on the index. Another common weighting methodology is market capitalization weighted, which means the largest company has the greatest weight, and therefore the largest influence on the performance of the index. There are other methodologies, such as price weighted or fundamental weighted - the great thing about Thematic is you can experiment with all of these to your heart’s content. From the "Build" step, click on "Edit" and you can choose your weighting strategy from there.
Step three: backtest and publish
Next, it’s time to test your index. A backtest is a simulation as to how a financial product would have performed in the market if it was available at some point in the past. This is where Thematic REALLY shines - we can generate backtests in seconds.
Backtesting gives index creators some level of comfort or confidence that the index would have performed well if it had existed in the past. (As a smart person, you know that past performance is not an indicator of future performance. Yet this is common practice anyway, as a way to check one’s work.)
At this point, if you’d like to change up some aspects of your index, Thematic's Index Builder lets you create multiple copies of your index that you can backtest and compare to one another. From the Index Builder "Build" step, click on "Copy" and then "Edit" the new copy that's been created.
Once you are happy with your results, simply select “Publish,” and your index is out there for the world to see. Whether you’re using it for your own purposes or looking to put a point of view out there, we encourage the intellectual discourse that comes from engaging with the community. Feedback is a gift, right? (On that note, please gift us your feedback on our products!)
In conclusion...
Happy index building! We can’t wait to see what you develop with Thematic. We’d love to hear from you - what we can do better, if you need help creating your own index - feel free to reach out at our email [email protected], or via Twitter @go_thematic.
